Opportunities and Threats of China’s Software Industry

China has a huge domestic market. Today, China has become the fourth largest economic entity in the world, the push of informatization and legal version brings a tremendous demand for software. The implementations of the policies such as the demand of building an innovation-oriented country, demand of information security and national security, Government Procurement Law, and etc., make the home-make software has certain advantages in the domestic market. The popularity rate of PC increases rapidly, this makes the demands of the software markets in education, games, entertainment and other mass consumers’ fields increase rapidly.

China has a tremendous information electronic manufacturing. In 2006, the revenue of China’s information electronic manufacturing reached 3.7 trillion Yuan, accounting for over 30% of the global electronic industry’s output and ranking second in the world. This manufacturing has enormous demand for embedded software, and it also provides a huge market for embedded software.

The advantage of human resources cost. 70% of the cost of software industry is human resources cost, China’s software talents cost is lower 30%-40% than India, and therefore, the cost advantage will enhance the competitiveness of domestic software enterprises in the international market.

Threat of Industrial Development

We are threatened by the foreign competitors. Software products aren’t protected through tariff and quotas, and the transmission cost is very low, these make software industry exposes itself completely in the international competition. The foreign brands occupy a majority of high-end system software, database software, high-end ERP products, and industrial application software. Although domestic enterprises have the advantages in those fields such as financial management software, antivirus software, Chinese information processing, and so on, the sales of domestic software is too small, it cannot challenge the international giants.

Piracy software is a serious problem. The intellectual property rights cannot be protected, which seriously damages the enthusiasm of software development and researching enterprises. The software developed by the enterprises cannot realize the value in the market to provide the subsequent funds for enterprises’ development; the enterprises lack the financial support for further technical innovation and upgrading development. If the situation cannot be changed effectively, the software industry will be hard to develop fast and healthy in deed.

The software enterprises encounter scale predicament. There are few of domestic software enterprises with more than 1000 stuff, but those larger scale software outsourcing enterprises in India usually have more than 10000 stuff. The problems brought by small scale are: first, it’s difficult to move personnel; second, it is relatively narrow of the skills coverage; third, it is hard to get larger orders.

The channels of investing and financing are lacked. Because of the shortage of funds, many enterprises can only invest the lesser short-term projects to sustain operation and cannot develop further the high-input, high-risk, high-yield large-scale software projects. Due to the tenability cycle of software project is short, it needs to be upgraded constantly, and enterprises will be largely constrained by the shortage of funds in the anaphase of development.

The talents bottleneck comes out. Although there is a large number of computer graduates enter the job market in China, the school education and market needs a re out of joint, so the enterprises cannot directly get the talents who can meet their demands. Before the corresponding training institutions and system are perfect, the talents are still the bottleneck of software enterprises’ development.

The basic software fields are weak. Because China’s software industry started late and invested small, recently, China’s software enterprises have a certain competitiveness on the fields of application software, embedded software, system integration and service fields which will not easy to be monopolized, but it is difficult for them to access into the monopolized basic software fields.

The value chain of software industry

The analysis of the software industry contributes to analyze position of the software enterprises in the value chain, so as to contribute to reveal correctly the core competencies of the software enterprises.

The high profits of software industry are from a few of most valuable work. Indian which started through software processing has realized that the labor-intensive processing cannot get the intellectual property rights of software products; they just worked for the upstream manufacturers, so they begin to move up to the upstream of the value chain of software industry, from providing professional software processing to developing core technologies and providing software services, the share of professional processing is declining continuously in the total exports. Chinese software enterprises should also focus on researching software core technologies and developing the brand software with independent intellectual property, in order to provide high-end software services.

From the perspective of analyzing the value chain, we should select the segment with higher value-added to invest in the value chain.

In the downstream services dominated by service mode, software services will occupy more in the software industry market, the barycenter of market supply and demand will transfer from products application to high-end professional services and planning advices, the overall solution which merges application computer technology, network technology, communications technology and others together will become the mainstream of services, and also it puts forwards higher requirements to the enterprises about the aspects, such as requirement analysis, system project design, industrial application knowledge, and so on. Recently, there are a lot of domestic service companies which engages in the low-end operations and maintenance, and some enterprises have begun to develop high-end consulting businesses and professional services.